19 March 2024, Tuesday, 13:24
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Economy of War

Economy of War
Stas Ivashkevich

What accounts for the current escalation of the conflict in Donbas, and when will it subside?

Additional light on this issue can shed by an economic analysis of military strategy of the Russian Federation.

"It seems that Russia uses a certain switch: it first lowers the tension, as it was in late June, then, just as these days, it again raises the degree of conflict," expressed his observation about the dynamics of combat operations in Donbas Ukrainian political analyst Volodymyr Fesenko, assuming that Moscow uses "controlled tension" in order to influence the Minsk process and the Western partners.

If we follow this trend in the longer term, there looms another economic factor that enables to explain why the Kremlin has raised or lowerd the intensity of the conflict so far, and how, most likely, this "switch" will be adjusted by it in the future.

Geopolitics

But before we move on to the economic analysis, the geopolitical picture still needs to be clarified. For example, take two Russian wars of the 21st century. Let us put numerous armed conflicts of the 90s aside, as the military strategy of the Russian Federation of the Soviet Union collapse times differed from Putin's strategy of military doctrines of 2000 and 2014.

What is it about? In simple terms - it is about blocking the accession of post-Soviet countries into NATO. Preventing free trade zone between the post-Soviet countries and the EU is unlikely to be a priority for Moscow - eventually, Tbilisi and Kyiv signed the necessary documents with Brussels, and they had been offered the EU membership anyway. But the anti-NATO motivation of the attack on Georgia was outlined by the then-President Dmitry Medvedev very clearly.

"If in 2008 we would have wavered, there would be a different geopolitical layout, and a number of countries that someone tried to artificially drag into NATO would likely be there," Mr Medvedev said at a meeting with officers three years after the conflict.

Indeed, the events leading up to the first European war of this century confirm this confession.

Georgia and NATO: the failed romance

An open diplomatic conflict between Moscow and Georgia started not in August of 2008, when Russian peace keepers were wounded as a result of the Georgian attack on Tskhinval, but 8 months prior. It was the referendum held in January of 2008, when three-quarters of the population of Georgia voted to join NATO that served as the detonator.

In response, Moscow gave up on the CIS sanctions against Abkhazia and South Ossetia and warned NATO that it could recognize the independence of Georgia's breakaway republics (the State Duma quickly adopted the proposal of the President). The threats gave fruit. At the Bucharest summit of NATO in April, where Tbilisi and Kiev formally asked for the approval of the road map to join the organization, Germany and France opposed this step, promising, however, to return to the issue in December of the same year.

Moscow did not agree with the wording. There began a series of incidents and skirmishes on the dividing line between Georgia and Abkhazia and South Ossetia, which continued, on the rise, for the next few months. EU, NATO and the OSCE accused separatists and Russian troops of perpetrating them. According to the Kremlin, they were provoked by Georgia.

In May, the Georgian ambassador to NATO acknowledged that, against the background of the conflict in Abkhazia and South Ossetia, the European Union refused to continue negotiations on membership of Tbilisi in NATO Tbilisi until its complete settlement.

Here the geopolitical goal of Kremlin was reached -- the door to NATO for Georgia was shut.

Why did the Kremlin bring the case to the armed conflict, despite the fact that the geopolitical need for this disappeared in May? The economic argument is the most compelling one in favor of the military action.

Informational background for recession

As can be seen from the graph above, the Russian military conflict with Georgia and Ukraine are united by one thing. Both of these events took place just before the fall in world oil prices and the subsequent decline of the Russian economy.

Along with the crisis in relations between Moscow and Tbilisi, in 2008, there unfolded another one, which was much more dangerous for Russia. The US economy entered a period of recession, which spread on the EU. In May, when the issue of Georgia's accession to NATO was no longer relevant for Russia, it was facing a new one -- the impending collapse of demand for energy resources (three-quarters of Russian exports).

The effect of oil fall on Russia was described, among others, by a well-known American economist Paul Krugman. Reduced export earnings caused devaluation of the ruble, which could not have been held for more than a half year by even half a trillion of foreign exchange reserves of the Russian Federation. Since the Russian business got loans in the West - in dollars and euros - appreciation of foreign currency increases the debt burden of banks and businesses, causing a drop in their stock market value, reducing their expenses and salaries. The result was a curtailed domestic consumption - the main engine of economic growth in Russia in recent years.

Thanks to the "small victorious war" of 2008, when this script came into effect, instead of possible social unrest, the Russian authorities, on the contrary, got a peak rating.

Useless aggression?

At the same time, under the influence of economic factors, Kremlin even sacrificed its geopolitical interests in the Ukrainian conflict.

After all, in 2014, the threat of Kyiv joining NATO did not exist. Even in 2008, when Viktor Yushchenko asked the Alliance for the accession road map, he was not supported in this by more than a quarter of Ukrainians. The Verkhovna Rada then immediately adopted a law saying that Ukraine could only enter the block only as a result of the referendum.

In 2010, at the initiative of the newly elected President Viktor Yanukovych, the Parliament excluded the North Atlantic integration from the national security strategy. By the time of Euromaidan, the number of NATO supporters dropped to 20%. Therefore, even after the overthrow of Yanukovych, Ukraine's non-alignment was confirmed by the newly appointed Prime Minister Arseniy Yatsenyuk.

But the military conflict with Russia radically changed the public mood. Now 60% of Ukrainians (the survey was conducted in the territories controlled by Kyiv) want to join the North Atlantic Alliance. President Poroshenko promised to hold a referendum on the issue, and the Verkhovna Rada has canceled the law on non-alignment.

Why did the Kremlin create a problem and pushed the country that was not eager to get there to NATO? Even if Putin feared that the government in Kyiv would decide to take this step in the future, contrary to public opinion -- Moscow would have years to orchestrate anti-NATO "Russian Spring" in Crimea and in the South-East of Ukraine...

Why was it necessary to do it in spring 2014? A plausible answer is seen in economic factors.

Russian bubble

After the 2010 revival, the Russian economy reached the limits of sustainable growth by 2012. A further increase in GDP was achieved by stimulating consumption, and already at the end of that year, experts spoke about the Russian "credit bubble". The government tried to curb overheating of the economy and did not give the "bubble" to burst in 2013, but the result of these measures was the threat of recession. The 2013 ended only in modest growth due to peak oil prices. But the upcoming collapse of the hydrocarbon market - as a result of offshore revolution in the US - was already seen.

It was clear that the Russian market would "collapse" in 2014, with a sharp deterioration in living standards in the Russian Federation expected against the background of economic recovery in other advanced countries. Four months before the event predicted by Mr Krugman, the Kremlin used the patriotic hype over the attack on Ukraine to have the economic collapse attributed to the (rather toothless) Western sanctions.

Minsk 2 and Minsk 3

The interdependence of the tension at Donbas with long-term trends in oil price changes have been easily traced so far. The peace agreement was signed in Minsk in February this year - immediately after the level of oil prices in January reached the bottom and started to go up - to long-term level of above 60 dollars per barrel.

The situation motivated the Kremlin to seeks the "thaw" with the West and try to remove the restrictions for Russian businesses to get Western loans - to spur the expected economic recovery. In exchange, it could offer the international community a transformation of the hot conflict in Donbass into a cold one. That is why after the Debaltseve "boiler" large-scale military operations in Donbass stopped.

But in July the seemingly stable growth of oil prices stopped - because of the expected settlement of the Iran's nuclear program issue. And after the sudden burst of the stock exchange bubble in China and signing of Iran's deal, it became clear that this trend was there to stay. With falling oil market no easing of Western sanctions could turn the Russian economy to growth. Therefore, starting from July, rather than Western commercial loans, the Kremlin has been in need of a new round of conflict with the West, for the sanctions based media background to drown out the news of a further fall in the domestic economy and acquit it in the eyes of the Russian electorate.

If the presented concept is correct, then in the near future, the Kremlin will encourage Donbas separatists to escalate the conflict. The accuracy of this prediction is, unfortunately, supported by the failure of the recent negotiations in Minsk. Based on this logic, we could hope for the decline in military activity of the militants only after the Kremlin forces them to do so, seeing the long-term trend of oil price increase.

Stas Ivashkevich for Charter97.org

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